Yellen repeatedly refutes: No manipulation of the US bond market, a strong US dollar is normal

US Treasury Secretary Yellen was "very busy" last weekend, as she successively refuted accusations from two "big shots".

First, Yellen firmly denied the accusations from economist Roubini, also known as the "Dr. Doom", who accused the US Treasury of manipulating the issuance of government bonds to lower the actual borrowing costs of the entire economy.

In an interview, Yellen stated that the arguments presented by Roubini in a paper published on Tuesday "imply a strategy aimed at easing financial conditions, I can assure you, there is absolutely no such strategy, we have never discussed anything like that."

Joshua Frost, the Treasury official responsible for overseeing debt issuance, also emphasized this month that the Treasury's actions were within the expectations of market participants.

This paper responded to recent attacks on Yellen by some Republican politicians. It highlighted a measure taken by the Treasury in November last year to curb the increase in the issuance of long-term securities and instead rely more on short-term bills. They believe that this was done to lower long-term borrowing costs and help boost the US economy before the November election.

However, this argument did not gain acceptance among bond traders and strategists.

Roubini and his co-author Stephen Miran previously served as Treasury officials during the Trump administration. They estimated that the Treasury's actions last autumn led to a 0.25 percentage point drop in the yield of the 10-year US Treasury bond—roughly equivalent to the impact of a 1 percentage point drop in the Fed's benchmark rate.

Miran and Roubini wrote in their paper, "The Treasury is dynamically managing financial conditions and, by managing these conditions, is encroaching on the core function of the Fed."

Additionally, a senior Treasury official criticized Roubini's paper on several fronts, including factual errors regarding the amount of US Treasury securities issued in the past year.

The official, who requested anonymity, stated that there were inaccuracies in the calculation of the transition from coupon securities to bills, which were factually incorrect in one aspect and misleading in another.

The official mentioned that the data provided in the paper was not based on actual issuances but on outdated forecasts from the Treasury Borrowing Advisory Committee (TBAC), an external group composed of market participants that advises the Treasury. It also excluded the second quarter of this year, when tax revenues allowed the Treasury to repay approximately $300 billion in bills.

Miran responded by saying that using TBAC's estimates was appropriate as these estimates are "incorporated into forward-looking markets".

He explained that the reason for excluding the second quarter was that it was a period when the Treasury received significant income due to tax deadlines, naturally leading to a contraction in bill issuance. Miran stated that he and Roubini did not claim that the Treasury took active measures during that quarter.

Refuting Trump

Yellen's second refutation was against former President Trump's view that a strong dollar is severely harming US manufacturers, while Yellen stated that the situation is not as simple as that. Janet Yellen has always upheld the G7's long-standing commitment to market-determined exchange rates. In an interview last week, she stated that when evaluating the impact of a strong US dollar, it is necessary to consider it from a broader perspective. She also played down the role of international trade in weakening manufacturing jobs in the United States.

"A very strong dollar will suppress exports and lead to an increase in imports," Yellen said. "But there are many other factors involved. I think you have to ask, why is the dollar strong?"

This question has become a hot topic ahead of the upcoming US presidential election in November, with Republicans opposing a strong dollar.

Yellen mentioned that the infrastructure, semiconductor, and clean energy bills signed by President Biden, as well as the electric vehicle policy introduced through the "Inflation Reduction Act," provide support for manufacturing to offset the impact of a strong dollar.

Yellen stated last week that the economic strength of the United States has attracted foreign capital, pushing up the value of the dollar. Measures taken by the Federal Reserve to curb inflation have resulted in interest rates higher than other countries, exacerbating the upward pressure on the dollar. She said at a press conference last Thursday, "We believe this is the way the system should operate."

In contrast, Trump previously stated, "We have a big currency problem," and "no one wants to buy our products because they are too expensive."

The 2024 Republican presidential candidate reiterated his claim that some of America's largest trading partners conspired to depress their currencies against the dollar, giving them an unfair advantage. His running mate, Ohio Senator JD Vance, suggested that weakening the dollar would boost American manufacturers.

US industrial output (three-quarters of which is manufacturing) climbed to its highest level since 2018 last month, ending a quarter of unexpected economic rebound. Business investment grew at the fastest pace in nearly a year, with equipment investment seeing its strongest growth since early 2022.

Yellen mentioned that while manufacturing jobs in the United States have been steadily declining over the past few decades, the proportion of manufacturing in GDP has remained relatively stable. She stated that job losses are more due to productivity improvements than trade.

Yellen stated a week before the July US jobs report was released that the overall labor market looks good. She said, "I would describe it as a strong, steady job market, not overheated, near the natural unemployment rate."

As the Federal Reserve slowly brings inflation closer to its 2% target, Yellen believes that the risks of inflation and employment are now balanced